Tuesday, May 04, 2010

Keynesian Spending Has Zilch Effect on Recovery

Stubbornness is a bad trait in politics and policy, one that will be punished at the polls this November.

The Obama administration continues to argue that its massive federal-spending campaign is essential to economic recovery. Yet the latest GDP report from the U.S. Department of Commerce shows that the 3.2 percent first-quarter economic growth rate got no help from government spending.

In fact, combined federal, state, and local spending actually fell 1.8 percent. What’s more, over the last three quarters of a mild V-shaped recovery, with an average quarterly rebound of 3.7 percent, government spending actually exerted a small net drag (-0.03%) on growth.

I guess it’s time to ask our Keynesian friends in and out of government what exactly happened to those vaunted multiplier effects they so loudly proclaimed. So far, there is zilch effect.

Turns out that all those entitlement transfers of income borrowed and taxed from Peter to pay Paul have made no direct contribution to the nation’s production of goods and services. This, however, comes after $318 billion of spending through April 23, according to the website recovery.org.

Pretty expensive fiscal habit, wouldn’t you say? But for what?

And who can blame taxpayers for saying, “Show me the money that was supposed to generate growth.” In the winter quarter, consumer spending increased 3.6 percent and business equipment investment rose 13.4 percent, all while inventories were rebuilt by $31 billion. But the G in the GDP equation C+I+G+(X-M) actually dropped. (That is, consumption + investment + government spending + the net exports/imports trade.) That’s right, dropped.

That failed G for federal, state, and local spending may cost untold trillions of dollars of future tax and debt burdens. Rather than stimulate growth, this will depress it in the years to come — unless we do something about it.

How about stopping the madness right now? How about “de-stimulating” the remaining $500 billion of unspent Keynesianism?

And how about some truth-telling about the big pick-up in business profits that is really behind the recovery — profits that have fueled a stock market boom which has created trillions of dollars of new wealth through capital gains that are being spent and invested in the private sector?

The only temporarily effective government-stimulus effect is coming from the Fed’s free-money, zero-interest-rate policy. And here, too, is stubbornness. For the economic emergency has long passed; the recession ended in last year’s second quarter. Yet the Fed — now controlled by Obama doves — stubbornly persists in maintaining an emergency pump-priming policy that surely will drive up inflation in the years ahead.

About Me

Larry Kudlow

Lawrence Kudlow is CNBC’s Senior Contributor. For many years, he was the host of CNBC’s “The Kudlow Report”. He is also the host of The Larry Kudlow Show, which broadcasts on Saturdays from 10am to 1pm ET on WABC Radio and is syndicated nationally by Cumulus Media. He is also a nationally syndicated columnist and a former Reagan economic advisor. CNBC's The Kudlow Report also airs on Sirius (ch.129) and XM (ch.127) weeknights at 7pm ET.